Houthi attacks in the Red Sea disrupt global trade flows…

Written by Peter McMeekin for Grain Brokers Australia on January 8, 2024.

Global supply chains are facing severe disruptions as Houthi rebels continue their attacks on commercial vessels in the Red Sea despite a new US-led security operation. The situation around the Bab al-Mandab Strait, a crucial shipping route connecting the Red Sea and the Mediterranean Sea to the Arabian Sea and the Indian Ocean, has escalated following a spate of attacks by the Yemen-based militants.

The rebel group, which is Iran-backed, has been using helicopters, drones and rockets against foreign-owned vessels transporting goods through the 30-kilometre-wide channel that splits Eritrea and Djibouti on the African side and Yemen on the Arabian Peninsula. The attacks escalated in November in a show of support for the Palestinian Islamist group Hamas and their war against Israel in Gaza. The group’s leadership has said it is only targeting Israel-bound vessels, but ships bound for multiple destinations have been attacked.

Shipping companies that move goods on one of the world’s busiest trade routes face tough decisions. They can send their vessels through the Red Sea if they are willing to risk attacks by the armed militia and bear the cost of sharply higher insurance premiums. Or they can sail an extra 6,000 kilometres around the bottom of Africa, adding a minimum of ten days to a ship’s transit time, depending on speed and destination, and burning considerably more fuel.

Neither option is appealing to the shipping companies, and both increase costs through higher freight, elevated insurance premiums and delivery delays. The global consumer will ultimately bear these expenses through higher prices of the goods they buy, raising the prospect of a renewed inflation shock for the world economy.

The Asia-Europe Suez Canal route is critically important, handling almost 15 per cent of global seaborne trade and nearly one-third of the world’s container trade. Up to 30 per cent of US East Coast cargo arrivals must transit the Red Sea and Suez Canal. Around half of the freight shipped via the Suez Canal comprises containerised goods and cars, with bulk cargoes such as grain and oilseeds, crude oil, liquefied natural gas, iron ore, coal and metals making up most of the balance.

A report released last week by economic think tank GTRI suggested the crisis could push shipping costs up by as much as 60 per cent and insurance premiums by 20 per cent as the additional transit times lead to equipment imbalances and stretch global shipping capacity. It is estimated that widespread rerouting via the Cape of Good Hope could reduce effective global container freight capability by as much as 15 per cent, with carriers forced to reduce the number of port calls to offset the impact of longer routes. So far, the Red Sea problems have not disrupted global supply chains to the same extent as the coronavirus pandemic, but the potential is there if a solution is not found.

Danish shipping giant Maersk announced last Tuesday a decision to pause Red Sea transits until further notice, underscoring the difficulties facing the international security operation, code-named Prosperity Guardian. Maersk had resumed travel through the Red Sea following a pause in December but halted it again after the latest attack. The US military reported a fleet of its navy helicopters had sunk three of the four Houthi boats that attacked the Maersk Hangzhou over the New Year weekend. Other major container companies such as Hapag-Lloyd, Evergreen Line and MSC continue to avoid the Red Sea route despite the international naval operation to protect ships.

The persistent violence against commercial vessels drew a stern warning from a number of countries last week, including the United States, Japan and the United Kingdom. "The Houthis will bear the responsibility of the consequences should they continue to threaten lives, the global economy, and the free flow of commerce in the region’s critical waterways,” a joint statement read.

In response, Yemen’s militant group has vowed to continue the attacks on vessels transiting the Red Sea until the conflict in Gaza ends. “Yemeni naval operations are ethical and will continue until the genocide crimes in Gaza are stopped, and food, medicine and fuel are allowed to enter,” Mohammed al-Bukhaiti, a Houthi spokesman, posted on X, the social media platform formerly known as Twitter.

To avoid strikes by the well-equipped militants, shipping companies have diverted more than $200 billion in trade away from the crucial Middle East trade route to the end of December, most rerouting via the Cape of Good Hope. It has reportedly impacted at least 330 container vessels with a total capacity of 4.5 million containers, whipping up a logistics storm for global trade. Freight rates are increasing daily, additional surcharges are being levied, shipping times are longer, and goods are delayed, particularly those originating in China.

The transit difficulties vary by vessel type, with oil tankers and dry bulk ships reporting fewer transit challenges. By contrast, the number of specialised car-carrying vessels using the Red Sea route more than halved last month compared to December 2022, to just 42 ships, and only one has been game enough to run the gauntlet this year. However, with the safety of crew, cargo and assets in mind, many oil and dry bulk ship owners are choosing the safer, slower, and costlier option. The fear is any escalation of the Israel conflict could very easily and very quickly see the rebels broaden the focus of their attacks, immediately impacting global oil and bulk food trade flows.

The dry bulk index, a measure of the average price paid for the transport of dry bulk goods such as fertiliser, coal, iron ore, grains and oilseeds, rose quickly from a low of 1385 points on November 2 to a peak of 3346 points on December 4, but promptly retracted to its current level of 2110 points, more than 50 per cent higher than before the Houthi attacks escalated. While dry bulk freight rates on the Red Sea route have jumped, those within Asia have remained relatively static.

The disruptions to global trade are also being compounded by low water levels in the Panama Canal, a critical trade pathway linking the Atlantic and Pacific Oceans. The Panama Canal Authority has imposed unprecedented restrictions on vessel transits as a severe drought limits the water supply essential to operate its lock system. That had forced many ships that would normally use the Panama Canal route to choose the longer route via the Red Sea and Suez Canal instead of the even longer Cape Horn option around the southernmost tip of South America.

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